Traxonia Railroad Inc. has three regional divisions organized as profit centers.

Question

Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2016:

The company operates three service departments: Shareholder Relations, Customer Support, and Legal. The Shareholder Relations Department conducts a variety of services for shareholders of the company. The Customer Support Department is the company’s point of contact for new service, complaints, and requests for repair. The department believes that the number of customer contacts is an activity base for this work. The Legal Department provides legal services for division management. The department believes that the number of hours billed is an activity base for this work. The following additional information has been gathered:

Revenues—East $ 888,000 Revenues—West 1,032,000 Revenues—Central 1,870,000 Operating Expenses—East 567,500 Operating Expenses—West 625,200 Operating Expenses—Central 1,173,140 Corporate Expenses—Shareholder Relations 152,000 Corporate Expenses—Customer Support 340,000 Corporate Expenses—Legal 272,600 General Corporate Officers’ Salaries 282,500

Explanation / Answer

1.

Central is best

A better divisional performance choice is ROI rate of return on investment

East West Central Total Revenues—East $888,000 1,032,000 1,870,000 $3,790,000 Operating Expenses—East 567,500 625,200 1,173,140 2,365,840 Income from operation before service department charges 320,500 406,800 696,860 1,424,160 Less-Service Department Charges Corporate Expenses—Customer Support 85000 102000 153000 340,000 Corporate Expenses—Legal 63450 94000 115150 272,600 Subtotal 148450 196000 268150 612600 Income from operation 172,050 210,800 428,710 811,560

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